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China Places Restrictions On Car Manufacturers

Jun 01, 2006

If carmakers in China want to build plants at other locations they must reach 80% of their manufacturing capacity before they will be allowed to build, according to a May 31 statement by the China's Ministry of Commerce. Additionally all new vehicle companies will be required to produce Chinese brand vehicles as well.

These requirements, which address both the issues of overcapacity and promoting local brands are in addition to a national auto industry policy that was launched last June. Included in the policy is the requirement that total investment in any new vehicle project located in China must be no less than $250 million with at least $62 million spend on research and development.

According to the statement there has been overcapacity in auto production. Currently, 8 million units are being produced. At issue is the fact that domestically-made cars totaled only 5.76 million units in 2005. Overcapacity has reduced prices and sent profits down by 24.3%.

"These new measures represent a warning to carmakers in China," said Matthew Li, a Beijing-based analyst with industry consultancy Automotive Resources Asia Ltd.

"However, conditions are different for different carmakers. Most global automakers, such as Toyota, Hyundai and Ford, lack capacity to meet growing demand in China. While the capacity for many less competitive players lies idle," Li told China Daily.

Kenneth Hsu, vice-president of Ford Motor China, said Ford is concerned about overcapacity, but added that his own company could not build cars fast enough. Sales with Chang'an Motor, Ford's partner, have increased by 147% to reach 27,000 cars in the first quarter of 2006. Production of this joint venture has been increased to 200,000 units from 150,000 in 2005. The two parties are also building a new 160,000-units plant in Jiangsu Province in the east.

Some foreign automakers have expressed their intention to allow their Chinese joint ventures to produce local-brand vehicles. Volkswagen said last year that it would help its two car ventures with First Automotive Works Corp and Shanghai Automotive Industry Corp develop local-brand cars if they wanted to do so. Hyundai's joint venture with Beijing Automotive Industry Corp said earlier this year that the venture would launch a Chinese-brand car in 2008.